General Market Index (GMI) table

16th day of $QQQ short term down-trend; Bottom or dead cat bounce? Keeping an eye on the $BABY

@ 11:07 am
GMI0/6
GMI-22/9
T210821%

The sharp rise on Friday came from very over-sold levels. Given that the market often is strong towards the end of the year, I would not be surprised to see a rise that takes us through mid-January. But with people being worried by   Ebola and the Fed’s cessation of QE , this market could resume its decline at anytime. I therefore took a very small amount of my university pension out of the market on Friday.   If the market rises to likely resistance levels, I will take more of my pension out of mutual funds, just in case. With the GMI at “0” I am very cautious.   I am already mainly in cash   in my trading accounts.   Things are just too volatile for everything but my most speculative trading funds. I have repeatedly written that I trade like a chicken. If I am wrong, and the GMI returns to a Buy signal, I can always go back in……

As this weekly chart of the SPY shows, a major up-trend (blue line) support line that lasted for more than one year has been broken. Also ominous is the fact that the critical 30 week average (red line) has been penetrated and there are large red spikes indicating high volume selling by institutions. I would not be surprised to see the current rebound   touch the 30 week average again, now around 193.   If that average curves down, that will be my signal to begin taking all of my university pension out of the market.   (I did that in 2000 and 2008.) That would signal the possible beginning of a Weinstein Stage 4 down-trend.

SPYwklytrend

Look what has happened when the 30 week average curved down. (Ignore the red arrows, left over from a Sell in May analysis.)

SPYwkly2008

If I think a Stage 4 down-trend is imminent, I will sleep soundly with most of my money on the sidelines until the GMI signals a BUY and the market enters a new confirmed Stage 2 up-trend. (I might also buy some SPY before those events occur, if the Worden T2108 gets down to single digits, where most market wash-outs since 1987   have ended.) The T2108   rebounded to 21% on Friday, after reaching a recent low of 13%. Dramatic market declines typically end below the green line on the chart, which is drawn at the 10% level. (Note we are not there yet!)…..

WklyT210810172014

You know I do not like to take a new long position on anything during a market down-trend.   But when a stock keeps hitting new all-time highs and coming up on my scans it signifies amazing relative strength and I add it to my watch list for close monitoring.   I don’t know why BABY is so strong but someone else apparently does. Check out this weekly chart of BABY, which had a successful green line break-out to an all-time high 13 weeks ago.   BABY’s   crawling higher just   showed up in my Darvas scan, which looks for stocks that have characteristics that I think Nicolas Darvas used to like. Of course, Darvas type stocks only out-performed in rising markets and BABY could stage a temper tantrum at anytime……

BABY10192014

 

GMI10172014

11th day of $QQQ short term down-trend; How long will this market decline last?

@ 9:55 am
GMI1/6
GMI-20/9
T210814%

If anyone tells me they know   when a market decline will end, I ignore them and run the other way.   The truth is that no one knows, except by chance, when a market will turn.   The market consists of millions of “voters” all betting on stocks using different strategies and each with their own tolerance for risk. In comparison, predicting political election returns appears easy! Trend followers are always   late. We get out after the market turns down and back in after it starts up. If we can trade consistent with the general market’s trend, we have a small   advantage to enable us to profit from trading.   Technical analysis gives us an edge over the others who are the equivalent of travelers in unfamiliar territory without the aid of a map or a GPS. So we watch for signs that have in the past signaled a change in trend and have worked for us.

So what do I look at for signs of a change in the market’s trend? (I have lived through many market cycles since I started trading around 1964.)

1. Stage analysis a la Stan Weinstein.   Stage analysis has been the major strategy that I used to get me out of the market in 2000 and 2008 and back in after the market turned. We are still in a Stage 2 up-trend in the DIA, SPY and QQQ. However, the SPY and DIA have now closed below their critical 30 week averages for the first time in over a year. The QQQ may follow them below its 30 week average in the coming week.   If they remain below these averages and the averages turn down, the market could be at the beginning of a major Stage 4 decline.   I will look for that and if it occurs, will transfer my pension money out of mutual funds and into money market funds in stages.   My more nimble trading accounts are already in cash.

2. GMI   My GMI flashed a Sell signal in late September and that is when I started to move into cash in my trading accounts. The GMI measures 6 indicators that have helped me to stay on the right side of the market over the years. If the GMI goes to “0” we will be that much closer to a Stage 4 decline. The GMI is typically on a “Buy” signal for so long, that it makes sense to me to be long in the market only during those times. Why fight the market trend?   So I will look to go long individual stocks again when the GMI closes above 3 (of 6) for two consecutive days= Buy signal.

3. The Worden T2108 acts as a pendulum of market extremes.   It measures the percentage of all NYSE stocks that closed above their simple   average price over the past 40 days. When T2108 is above 80% that is usually as good as it gets and I look for a decline or leveling off in the market. When T2108 gets to single digits, a rare event, it reflects a deeply oversold market and I should be looking to get back in only via a general market index ETF, like SPY. The market always comes back, but not all individual stocks do.   So it is a good idea for me to buy a small amount of SPY and to add to it if the bottom holds. The T2108 closed Friday at 14%. In 2013, the lowest it reached was 13%. During a relatively large decline in 2011 it reached 7%. When T2108 gets into single digits the business news is quite bad.   At that time I must fight my emotions and “fly on instruments” and make an initial small investment in the index ETF whiles I grit my teeth and hold my nose.   The key is to start small and add only at higher prices if the bottom holds. Alternatively and much less stressful, I can just wait for the new Stage 2 advance to begin before I wade back in.

4. I watch the daily put/call ratio.   When it gets close to 1.2, the market at least bounces. A ratio of 1.2 means that 120 put options were traded for every 100 call options traded that day. This means that option traders are extremely bearish and the market usually confounds these people by moving up.   Think of it as a “contrary” indicator, like most other investor sentiment measures. On Friday, IBD says the ratio reached 1.16.

5. IBD Market Pulse.   I never made money trading until I started reading IBD in the 1980’s. IBD is the technical analyst’s newspaper. IBD publishes their market pulse in the paper every day.   Their methodology is very good and in contrast to the other major business papers and establishment   media, IBD will actually advise their readers to get out of the market. William O’Neil’s book (How to make money…) is listed to the right of this page and is literally a users manual for his newspaper, IBD. My university class has this book as required reading. IBD has called the market in a correction for almost as long as the GMI has been on its recent Sell signal. (We employ different technical strategies for assessing the market’s trend, yet we frequently agree.)

6. The final point I like to remember is that unless there are significant adverse tax consequences or mutual fund penalties from timing the market, there is no reason that I should not exit the market if I am uncomfortable. The media try to scare us into staying invested, perhaps because the amount of assets they manage for us usually determines the amount of management fees they take. They warn that if one gets out of the market, one will likely miss the bottom.   The way I look at it is if I get out of a fund at price “X” and the value of my fund   declines, as long as I get back in lower then X, I come out ahead. I therefore do not have to get back in at the exact bottom, and I get to sleep more soundly and watch from the sidelines as the decline continues……..

GMI10102014

6th day of $QQQ short term down-trend; 11 Biotechs with green line break-outs: $ARDX,$VRTX,$AGIO,$UTHR,$RCPT,$ESPR,$OVAS,$PTCT,$CMRX,$BSTC,$TTPH

@ 10:03 pm
GMI1/6
GMI-22/9
T210821%

The GMI remains on a Sell signal and I remain largely in cash and hedged.   I do hold a few biotech stocks, see discussion below. This market is rebounding from a high volume decline. It remains to be seen whether this rebound will retake prior peaks or falter somewhere before. This week is very critical for determining the significance of this bounce. I would want to see the QQQ close the week above 99.30.   The QQQ is now below its 10 week average and I cannot make money on the long side when this is so.   There were 50 52-week highs and 134 new lows on Friday.   One possible sign of a meaningful bounce was the fact that the Worden T2108 hit an intraday low of 13% on Thursday.   That is a very oversold level. Put/call ratios were also over 1.0, signalling extreme bearishness among option traders. IBD sees the market in a correction. However, it is just impossible to know in advance whether we have a “dead cat bounce” or a meaningful bottom. I will start to buy the TQQQ when and if the QQQ short term trend turns up….

GMI10032014

Meanwhile, my readers know that I have been focusing on the bio-tech area.   There are so many discoveries occurring in   drug research that this is one area that can buck the market trend. I have been scanning bio-techs each day for high volume break-outs.   I then look at monthly charts to see whether each is near a “green line break-out” to an all-time high. When a stock breaks above a high multi-month (at least 3 month) base, it often means something important is occurring within the company. Here are some weekly graphs of biotech stocks that have come to my attention.   Somewhere among these may be a company with the next new cure for a major disease. These companies are worthy of further research ( a review of recent news stories often explains why the stock surged) and monitoring for possible purchase. If any of these decline below their green line, I   become less interested in them. One approach I like is to buy a few shares (up to 25) of each just to keep them on my radar screen.   I   then slowly add more to those that prove themselves and exit those that fail. I am looking for multi-month or year long moves, not for a short bounce. Click on a chart to enlarge.

ARDXwkly VRTXwkly AGIOwkly UTHRwkly RCPTwkly ESPRwkly OVASwkly PTCTwkly CMRXwkly BSTCwkly TTPHwkly

When a stock breaks out of a monthly, green line top to an all-time high it can be the beginning of a huge move.   As an example, look at this monthly chart of AMGN in 2012. Note also what happened after a failed green line break-out in 2006. When a stock comes back below its green line, it is a sign for caution. But a stock can fail, find support at the break-out, and then resume its rise.

AMGNmonthly